Slow-motion Crash: Are there lessons to be learned from 1987?

Today's Financial News - Posted October 15, 2008

The lock-up of the financial system has thrown global markets into turmoil. Indexes are crushed. Stocks are crashing. Portfolios are decimated. Of course, we’ve seen it all happen before. Are the lessons of the Crash of ‘87 still applicable?

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by J. Christoph Amberger

Baltimore - (TFN): Back in my college days, I witnessed the 1987 Crash from the perspective of a student who had the Deutsche Mark-equivalent of $100 in his checking account, $2000 in savings, and a stock portfolio that, on a good day, tallied up to about $1,500.

Only there were no good days between October 2 and October 23 of that year.

If you’ve forgotten what happened back then, here’s a small recap: The Dow Jones chalked up an all-time high of 2,685 on August 14, 1987. After some rumblings in September, it began to crash on October 2. What now appears as a straight line down in the charts was actually a grueling retreat over three weeks. After October 23, it recovered for a bit… to plunge even deeper, to 1,766 by December 11.

Within three months, the Dow Jones Industrial Average had lost over 34% of its valuation.

My portfolio was shot. Young, disgusted, and chronically short on cash, I probably did the most idiotic thing of my life. I sold the remaining shares in my portfolio and converted the proceeds into beer.

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It took me years — until 1989 — to start investing again.

Which really turns out to have been a stupid thing. What I should have done was take half of my savings, around $1000, and bought shares at depressed levels. Maybe just $50 worth of shares a week! Because two years later, stocks were right where they had been before what the nattering nabobs of the financial advisory industry by then were calling “Crashette of 1987″.

On October 9, we had the subdued anniversary of the Dow’s most recent all-time high… at 14,164. As of today, the Dow has lost about 31% of its valuation… and may have some way to go.

Stocks you buy at today’s levels will have to go up two thirds — or even double — to make up for that loss.

It seems impossible. But I look at it this way.

The October 2007 high represented a gain of 427.5% over the 1987 All-Time High… and a 702% gain over the 1987 Crashette Low.

And in the meantime, we’ve had a half-dozen mega booms and busts… all of which we turned into profitable wealth-building engines.

I for one will be making amends for my 1987 youthful indiscretion… and keep buying shares of ridiculously under priced stocks. Not for quick turnarounds, mind you — even though we still do that! But as long-term holds that will end up netting me 200, 300, maybe even 700% gains.

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